The rapid fall in oil prices caused by the Covid-19 pandemic will reduce the combined free cash flow from the FPSO fields, which produced more than three-quarters of their original resources, to just $ 2.20 per barrel this year. This is a breathtaking drop from $ 11.10 a barrel in 2019, reveals an impact analysis from Rystad Energy. We also estimate that 40% of the 96 assets that produced more than 75% of their original resources will end 2020 with negative cash flow. Given our outlook for base oil prices, with prices going up next year and until 2022, free cash flow will return to its 2019 levels. However, as these mature deposits see production stagnate, Free cash flow will quickly decline, ultimately threatening the profitability of many FPSO assets.
“A concern for operators is whether the profitability of production fields will deteriorate to such an extent that the premature termination of aging fields will prove to be the most rational decision,” said Aleksander Erstad, analyst at energy service of Rystad Energy.
The field economy alone causes headaches for many FPSO operators, but other challenges could also compound the problems.
Unexpected shutdowns of FPSO production due to the Covid-19 outbreaks have already occurred and continue to pose a risk that could seriously affect the health of individuals and the profitability of the field. Some FPSOs are also the target of supply disruptions, a factor that could add to other problems and lead to the permanent closure of several late-production FPSOs.
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Fields using leased FPSOs are in the worst position, with around 70% of late production assets with a net present value less than zero. This not only puts operators in an awkward position, but also FPSO providers, who are faced with two possible outcomes – neither of which is favorable.
FPSO contracts can be renegotiated for a lower daily rate to reduce the rental rate, thereby improving the field’s net present value (NPV). Or, in the worst case, rental contracts can be terminated early.
The currently difficult market conditions mean that future FPSO sanctions are at a minimum, and there are few opportunities for FPSO suppliers to find new jobs and redeploy their vessels. This essentially obliges suppliers to accept a reduction in the daily rate in order to keep their ships in working order.
The NPV for the late production fields with leased FPSOs is currently estimated at – $ 2.90 per barrel remaining, while the overall figure for all FPSOs is $ 3 per barrel remaining. Although generally positive, our analysis of the 96 FPSO fields that have already produced more than 75% of their original resources shows that 30% to 40% of these have a negative NPV.
By Rystad Energy
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